CPA & Business Advisory
Blog

Changes to Section 179D Deduction

According to the code section 179D, the designer primarily responsible for designing the energy efficient aspects of government buildings (including new construction and rehabilitation) may be able to take the federal energy efficient commercial property tax deduction for doing so instead of the owner of the property. This deduction is passed to them from the government agency for which the building was designed as the government agency does not pay tax and therefore would not get the benefit for this deduction.

The designer is defined as the person(s) that create the technical specifications for installation of the energy efficient commercial building property, and can include architects, engineers, environmental consultants, and contractors in certain cases.

Under this section, the word government includes Federal, state, and local government agencies, and although all government building categories have benefited from this, the most frequent projects are K-12 public schools, state universities and colleges. Other categories include post offices, military bases, libraries, courthouses, and hospitals.

The amount of the deduction passed to the designer is the lesser of the actual cost of the property or the calculation below:(The square footage for the building (new construction) or area improved (rehabilitation))
x ($0.60 per each of the three areas that you pass ($1.80 total) the energy efficiency test (HVAC/Lighting/Building Envelope))

Section 179D has been beneficial for designers of this property who work with government agencies to build government buildings, depending on the size and level of energy efficiency, because they can take an additional tax deduction for the energy efficient improvements that were made. This deduction is a tax only deduction on the tax return of the designer.

Till now, a taxpayer could only take advantage of this deduction for certified energy efficient property added in open tax years (prior three years), by amending those returns and claiming the deduction.

With the recent passing of Revenue Procedure 2011-14, taxpayers are now able to claim this deduction for open and closed tax years without filing amended tax returns. Under this revenue procedure a taxpayer can file Form 3115, Application for Change in Accounting Method to claim the deduction. This makes the deduction automatic, and the change is retroactive to 2006 for certified energy efficient property placed in service since then. This creates the ability to get deductions from tax years that are otherwise closed, and eliminate the need of filing amended tax returns as the depreciation catch up can be taken in the current tax year.